NZD/USD falls back to 0.6750, eyes last week’s lows as kiwi struggles amid safe-haven flows

• NZD/USD recently slipped back to the 0.6750 level as the dollar picked up amid safe-haven flows.
• The kiwi and other risk-sensitive currencies are performing poorly as equities tumble amid Fed tightening fears.

NZD/USD has dipped back to the 0.6750 level in recent trade and has recently been probing last week’s lows in the 0.6740 area. At present, the pair trades with losses of about 0.5%, worse than that of its antipodean counterpart, but roughly in line with that being seen in other USD majors. Having failed in its early European session attempts to test its 21-day moving average in the 0.6780s, NZD/USD has come under selling pressure as markets adopt a more risk-off posture during US trade. Further risk-off induced USD strength may see the pair break lower towards a test of December lows in the 0.6700 area.  

The yen and US dollar are the best performing G10 currencies amid a safe-haven bid as Wall Street continues to crater. Notably, the Nasdaq 100 index recently fell more than 10% back from its recent record highs, classing the latest downturn for the big-tech heavy index as a “correction”. This is undermining the appeal of risk-sensitive currencies such as the kiwi. The main driver of risk-off at the start of the new week appears to be fears regarding a faster pace of Fed monetary policy normalisation this year.

Risk appetite has been ropey since last week’s hawkish Fed minutes that showed strong support on the FOMC for the Fed to get going with rate hikes and balance sheet reduction in 2022. Last Friday’s strong US labour market report, strong in the sense that wage inflation picked up and measures of slack (such as the unemployment rate) improved more than expected, at least, is being viewed as endorsing the Fed’s newer, more hawkish mantra. US Consumer Price Inflation (CPI) data on Wednesday is expected to do the same, as it is likely to show headline inflation surpassing 7.0% YoY.

Fed Chair Jerome Powell will be speaking on Tuesday and Vice Chairwoman Lael Brainard on Thursday at their respective nomination confirmation hearings. These remarks will be the highlights as far as Fed rhetoric is concerned this week, though other FOMC members will also be orating. There is also the (not so) small matter of the US December Retail Sales report on Friday and the preliminary January University of Michigan Consumer Sentiment survey, with the latter a timely gauge on the economic impact of the spread of Omicron. Risk appetite and USD flows will be the dominant force for NZD/USD this week, with New Zealand Building Consents data on Thursday unlikely to receive much market attention.